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The many failings of Canada’s supply-management system are government’s fault, not farmers’

SYLVAIN CHARLEBOIS

Special to The Globe and Mail

Published April 23, 2017Updated April 23, 2017

Sylvain Charlebois is dean of the Faculty of Management and professor in food distribution and policy at Dalhousie University.

For the first time, U.S. President Donald Trump acknowledged last week that he knows of the existence of supply management, also known by the global community as Canada's milk cartel. For years, dairy farmers in this country have been resistant to any change to Canada's milk and cheese policies. But with NAFTA 2.0 on the way, Canadian dairy farmers are about to find out that decades of defending the status quo was the wrong strategy.

It would have been fascinating to be in the room when Mr. Trump got his first briefing on the Canadian dairy industry. Anyone who has tried to explain supply management to Americans would appreciate the reaction. Mainly, it is one of disbelief. Supply management is about producing what we need for dairy, poultry and eggs. Quotas are given to farmers so they can produce the commodities needed, while extremely high tariffs are placed on imported products that could compromise our delicate supply-and-demand equilibrium. Given that dairy accounts for 80 per cent of agricultural cash receipts within supply management, it has always attracted the most attention.

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Such a program could be expected in an emerging market or even in a highly centralized economy. But no one would expect such a program to exist in a developed economy like Canada's. Since Europe eliminated quotas several months ago, Canada's is now the only developed economy in the world with such a scheme.

Given our obsession with marketing boards, we are accustomed to it. We see our boards as a natural, very effective model to protect our farmers by countervailing power down the food chain. Farmers who are inherently price-takers can only get the price oligopolistic powers are willing to pay. Farmers are often highly vulnerable. Often, dairy farmers around the world are exposed to wild milk-price fluctuations and must adapt quickly. But supply management allows our dairy farmers to rely on predictable revenues year in and year out. A simple approach, really, but maintaining such a system for more than five decades has come at a tremendous cost.

First, our dairy industry is highly inefficient. Several studies over the years have pointed to how costly milk production is in Canada compared with other industrialized economies. Switzerland is the only place where milk production is more expensive. High farm-gate milk prices are not allowing our dairy processors and restaurant owners to become more competitive. The entire food chain has been held back for years.

Also, supply management in the dairy industry has led to a sense of institutionalized entitlement. The words "consumer" and "customer" have no meaning. Over the years, dairy farmers have become great cost managers, as it is the only way for them to earn more by doing the same thing. By virtue of maintaining supply management, dairy farmers are, for all intents and purposes, bureaucrats, not entrepreneurs. They work for the state, not for the economy. Dairy Farmers of Canada has spent hundreds of millions of dollars over the years promoting milk to Canadians, while the consumption of fluid milk per capita has dropped for almost three decades. No strategy whatsoever. Value chains and/or design thinking are irrelevant concepts to dairy farmers. However, a growing number are indeed entrepreneurs and want to think differently but are dragged down by the mediocre class.

As Canada was standing still, the world changed. For years, many have called for changes to supply management – in vain. But a sudden scrapping of supply management would be a mistake, because quotas are worth more than $30-billion. Unlike Europe's former system, ours has a lot of fiscal baggage. Most importantly, we are just north of the United States, where dairy farms are much more competitive. Getting rid of supply management overnight would lead to a complete collapse of our dairy industry. For a strong agricultural economy, Canada needs to maintain some domestic production capacity to support our processors, where the value adding and innovation really occur.

What is unfortunate is the current economic climate around the world, which is being driven by the Trump administration and Brexit. We are about to see an entire industry filled with dedicated workers on alert. Instead of developing a vision for our dairy sector and taking ownership of our own destiny, we are about to see changes based on someone else's terms.

Jobs in rural Canada and young farmers are at stake. Dairy farmers have lobbied Ottawa hard for decades to maintain the current system, and Ottawa listened and bowed.

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However, let's be clear, dairy farmers are not to blame – they were just protecting assets and defending the next generation. Who wouldn't? But the leadership should have come from Ottawa. Several federal governments have consistently shown weak leadership on this file. Little strategic attention was given to our supply management regime. Shame on them.

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